The declining stock of US equities

Although Yellen wasn't as hawkish as she could have been (she didn't repeat the Rosengren/minutes line about the market underestimating the degree of possible tightening), she was also a damn sight less dovish than she could have been as well.  It was refreshing to hear her take a generally upbeat take on things, albeit couched with every caveat under the sun (and a few generally found under Alpha Centauri.)

Like the honey badger, however, Spooz don't give a damn, they just do what they want.  Recently, that has generally involved "going up".  The ongoing resilience of US equities in some ways seems to defy both fundamentals and common sense, though specious rationales can always be trotted out to justify anything.  As a sense check, Macro Man crafted a little model using just changes in the Citi economic surprise index and a measure of Fed pricing to see how well it fit with changes in the SPX.  Although the correlation isn't perfect- you'd hardly expect it to be- calculating coefficients using data back to 2006 still generates a decent fit over the last couple of years.   Notably, the model is in agreement with the recent strength of US equities.

Of course, this model is merely descriptive, not prescriptive- in other words, it's not trying to predict price action, merely explain it.  On a more macro basis, the real elephant in the room when it comes to US equities is, of course, buybacks.  Although one hears anecdotes of buyback programs or even statistics about the annual run rate of buybacks, sometimes it's hard to put those numbers into perspective.

Macro Man finally got around to calculating an index to illustrate the impact of buybacks, and it's pretty stunning.  The methodology was simply to divide the market capitalization of the SPX by the price to get a measure of "shares outstanding".   After rising steadily in the bull market of the 1990's, the index peaked in 2004 and has trended sideways to lower ever since.  It's currently a gnat's whisker from the low registered in April '09 and some 13% below the highs of 2004.

The irony is a delicious one.   After a crisis engendered by banks' financial engineering led to a regulatory crackdown on such practices, the entire modus vivendi of large American corporations over the past few years has been...financial engineering!  Over the last half-century, the only other episode of a steady decline in SPX shares outstanding was the second half of the 1980's, a period not generally renowned for either prudent business practices or financial stability.  At least back then savers could earn a decent return on their cash without being forced into equities....

In the meantime, the contrast with Europe remains stark.  Look no further than the banking sector, where the SX7E remains locked in a pennant formation that looks suspiciously like a continuation pattern...

Like the rest of the SPX, US banks continue to show signs of life, come hell or high water:

The longer the US danse macabre upwards continues, the more likely that it will end badly.  Of course, saying how something will end is a hell of a lot easier than saying when it will end; for the time being, the bear argument is clearly not in force in the US, though Macro Man (and, he suspects, others) are watching sundry canaries with a ready eye.

Finally, mea culpa for a bad call on USD/CAD yesterday.  At least your author got the stop level right...